(Bloomberg) -- Simon Property Group Inc.’s rescinded $3.6 billion offer to buy rival mall owner Taubman Centers Inc. is going to trial Monday after a monthslong dispute sparked by the pandemic.
The companies announced a buyout agreement in February, just before Covid-19 hit the U.S., wreaking havoc on retailers and landlords. Simon in June said it was walking away from the deal and sought in court to have it “validly terminated.” Taubman countersued in an effort to force Simon to complete the purchase. Michigan Circuit Court Judge James Alexander will hear the case without a jury and is expected to rule by the end of the year.
The timing of the offer couldn’t have been worse. Simon, one of the biggest U.S. mall owners, agreed to pay $52.20 a share for Taubman, a 51% premium. Taubman’s shares have dropped about 30% since March as the virus spread across the country, spurring lockdowns that shuttered bricks-and-mortar stores and pushed shoppers increasingly to the internet.
“This situation is black swan times two -- or three,” Simon Property Chief Executive Officer David Simon said about the pandemic on the company’s earnings call this month.
There’s a lot at stake for both landlords. Mall owners have been crushed by social-distancing measures, and their cash flow is suffering as rent collections drop and vacancies increase. Even after stores reopened, sales have been slow to recover, and retailer bankruptcies are mounting across the industry.
At a hearing Friday, Alexander told lawyers for both companies “see you Monday unless things happen over the weekend,” hinting at the possibility of a settlement.
“I wouldn’t be surprised at all to see a settlement over the weekend,” Bloomberg Intelligence analyst Elliott Stein said in an interview.
For shareholders of the smaller Taubman, it’s critical for the deal to go through, even at a reduced price, according to Lindsay Dutch, a Bloomberg Intelligence analyst. “There would be a difficult road ahead if it fails since Taubman has to manage the excess vacancies, all the empty stores coming to malls, and doing so with a much tighter balance sheet than Simon,” she said.
Simon, meanwhile, has coveted Taubman’s high-quality centers for years, but “they’re also super-focused on cash flow and want to make sure they’ll get a return on their acquisition,” Dutch added.
Read more: Mall shakeout just beginning as complex debt drowns owners
Representatives for Simon and Taubman declined to comment.
In court filings, Indianapolis-based Simon argued it had legitimate grounds to scrap the buyout because Taubman’s revenue suffered a “material adverse effect” from the coronavirus’s advent and the company didn’t take proper steps to mitigate damage from the pandemic. Simon also cited Taubman’s move to amend $1.63 billion in credit agreements as a violation of the deal.
For its part, Taubman noted it took some of the same steps as Simon to address the fallout from Covid-19, and argued its rival was legally obligated to complete the transaction on June 30 as scheduled.
The Bloomfield Hills, Michigan-based company, led by CEO Robert Taubman, wants the judge to enforce the buyout or award the company damages, including the loss of the premium offered to shareholders. Those damages could exceed $1 billion, according to Elliott Stein, a senior litigation analyst at Bloomberg Intelligence.
Alexander Goldfarb, an analyst at Piper Sandler & Co., said investors generally believe Taubman has the stronger legal case, but that Simon will fight paying the premium it agreed to and is better equipped financially to drag out the dispute. That could motivate Taubman to settle sooner rather than later because it’s more strapped for cash, he said.
Both companies already have run up big tabs: In the third quarter, Taubman recorded $17 million in lawsuit-related expenses, while Simon had roughly $20 million in total legal costs, some of which went toward fighting the deal. “You’re not spending that kind of legal money if you’re just trying to give it the college try,” Goldfarb said.
‘Taking a Risk’
In a large number of buyouts that imploded over Covid-19 concerns, the parties have found ways to come up with a settlement by cutting the price by about 10%, said Larry Hamermesh, a University of Pennsylvania law professor who specializes in corporate M&A cases.
“It’s a sensible resolution that happens frequently,” he said. “It may be difficult to make the case that Covid alone is enough to justify a material adverse change since we haven’t had any rulings to that effect so far. Both sides are taking a risk going to trial.”
But both firms have already gone through a monthslong mediation process to no avail.
“For a settlement, the two parties need to come to an agreement on a lower price, and that may be difficult to do,” Dutch said. “You have two strong-minded CEOs of two companies, and getting them to come to an agreement to work together could take time.”
The case is Simon Property Group Inc. v. Taubman Centers Inc., No. 2020-181675-CB, Michigan Circuit Court, Oakland County (Pontiac).
(Updates with judge’s comments in sixth paragraph)
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